Merkel rebuffs IMF call to raise euro zone fund

By IBT Staff Reporter On 12/06/10 AT 7:24 AM

Euro zone finance ministers meeting on Monday face IMF pressure to increase the size of a 750 billion euro ($1,006 billion) safety net for debt-stricken members to halt contagion in the single currency bloc.

But EU paymaster Germany firmly rejected any such move and also dismissed a call by two veteran finance ministers for joint euro bonds guaranteed by the whole euro zone.

International Monetary Fund chief Dominique Strauss-Kahn will call on ministers to boost the rescue pool and urge the European Central Bank (ECB) to step up its purchases of bonds to stem the crisis, according to an IMF report obtained by Reuters.

However, German Chancellor Angela Merkel said she saw no need to increase the size of the bailout mechanism.

She also said the European Union treaty did not allow for issuing common bonds, which would anyway reduce the element of competition and the interest rate incentive for fiscal good behavior.

The ECB engineered a dip in the soaring borrowing costs of weaker euro zone states late last week by stepping up purchases of Irish and Portuguese government bonds, according to traders, and hinting it could do more.

But yield spreads over safe-haven German Bunds resumed their rise on Monday, as did the cost of insuring their debt against default, and many analysts say only sustained, massive central bank bond-buying can reverse the trend.

The IMF report says a recovery in the euro zone, led by strong growth in its largest economy Germany, could easily be derailed by renewed market turmoil and describes pressure on so-called peripheral euro countries as a severe downside risk.

Wide differences remain in the 16-nation single currency area over how to overcome a debt crisis that has already led to EU-IMF bailouts for Greece and Ireland, and now threatens to spread to Portugal, Spain and possibly Italy.

Jean-Claude Juncker, chairman of euro zone finance ministers, and Italian Finance Minister Giulio Tremonti outlined a proposal in Monday's Financial Times for a joint sovereign bond, or E-bond, to send a signal to markets and citizens of the irreversibility of the euro.

German Finance Minister Wolfgang Schaeuble warned in a newspaper interview that the risk of an anti-euro political party emerging in Germany should be taken seriously.

The euro has become more unpopular among Germans since this year's financial rescue of heavily indebted Greece, which ran counter to a no bailout principle established before the euro was created in 1999.

IRISH RESPITE

The IMF report and the situation on European debt markets will be discussed at length, a euro zone source said, at the regular Monday meeting of the so-called Eurogroup.

That will be followed by a meeting on Tuesday of ministers from the broader 27-nation European Union, who are expected to formally approve an 85 billion euro aid package for Ireland and discuss the reform of EU budget rules.

One influential economist, Jim O'Neill, chairman of Goldman Sachs Asset Management, said the idea of common euro zone bonds made sense, and new ideas now emerging would eventually underpin European monetary union with stronger central leadership.

If EMU is to thrive and to recover from this mess we're in, something like a common European bond as a symbol of a more truly coordinated and shared agenda by Europe's policymakers is not a bad idea, O'Neill told Reuters Insider television.

O'Neill, whose division manages some $800 billion in assets, also said it was worth considering buying a basket of euro zone peripheral sovereign debt at current prices.

Ireland gained a small respite on Monday when clearing house LCH.Clearnet reduced the deposit it requires bond traders to pay on Irish sovereign bonds to 30 percent of net positions from an emergency level of 45 percent set on November 25 before the rescue.

The Dublin government is set to win support in parliament on Tuesday for a tough austerity budget after the main opposition Fine Gael party said it expected the measure to pass.

One Fine Gael lawmaker offered to throw Prime Minister Brian Cowen's unpopular government a lifeline by abstaining if needed to ensure the budget goes through.

The rolling market pressure on euro zone sovereign debt has prompted speculation, mostly in Britain and the United States, that the single currency might break up or that some weaker countries might have to leave it.

But Merkel said Germany would always do everything to have a strong, safe euro.

In comments that could fuel market pressure on Madrid, Austrian Chancellor Werner Faymann was quoted as saying that Spain may not be able to avoid seeking a bailout.

The Spaniards will do everything to keep from coming into the safety net. Unfortunately, no one can rule that out, he told the Wirtschaftsblatt newspaper.